Empirical assessment of the impact of external reserves on economic growth in Nigeria

Abstract

In the last few decades, the continuous depreciation in the value of the naira occasioned by the dwindling external reserves affected the exchange rate resulting in several macroeconomic fundamentals in Nigeria. The objective of the study is to examine the impact of external reserves on economic growth in Nigeria. The study utilizes the descriptive approach for the trend analysis, while the autoregressive distributed lag (ARDL) model was relied upon in scrutinizing the contemporaneous dynamics for the unrestricted ECM. The data that were culled from several issues of the Central Bank of Nigeria's annual report and statement of account covered the period 1986-2020. Descriptively, the study finds that economic growth rate and external reserves witnessed fluctuations with the latter being relatively more pronounced. Accordingly, the study finds that in the long run, all the explanatory variables were key determinants of economic growth in Nigeria. Specifically, economic growth is significantly and positively responsive to changes in external reserves by 0.22%, inflation rate by 0.08%, and a one period lag of GDP of 0.21% contrary to its negative response to changes in exchange rate of 0.10% in the short run. The paper recommended that the government may consider providing conducive environment for increased productivity, thereby increasing foreign reserves. Likewise, the situation that may encourage exchange rate misalignment should be avoided. Finally, inflation rate must be controlled within a single digit.